The New Headquarter Company Regime

Internationally, many jurisdictions are popular for establishing holding and headquarter companies for multinational groups, like Luxembourg, The Netherlands, Switzerland and Singapore. Closer to home, Mauritius has established it self as a favourable headquarter jurisdiction, especially for investments into Africa. Up to now, local tax and exchange controls have prevented South Africa from being suitable for these purposes.

South Africa has always had certain commercial advantages for use as an African headquarters location, including a sizeable economy and a wide network of tax treaties. Despite these commercial advantages, South Africa lacked the favourable tax treatment that other jurisdictions offer to multinationals. While taxis never the sole reason for using a particular jurisdiction, it remains an important determinant.

The new South African headquarter company regime attempts to remedy this position. The government plans to make South Africa a gateway for African investments. The main negative tax issues were identified as being the controlled foreign company (‘CFC’) rules, secondary tax on companies (‘STC’) and transfer pricing rules. The new headquarter regime is generally exempt from all these rules.

If the above requirements are met, the following tax concessions will apply:

• The foreign subsidiaries of the headquarter company will not be CFCs of the headquarter company. They will, however, be CFCs in relation to any South African resident shareholders, if they indirectly hold more than 50% of the participation or voting rights in the headquarter company.

• Dividends declared by a headquarter company will be exempt from STC and income tax for shareholders.

• A headquarter company will be exempt from CGT on gains from the sale of a 20% or more equity stake in a foreign company.

Internationally, there is a difference between headquarter regimes and intermediary holding company (IHC) regimes. An IHC is generally interposed between the holding company and the operating subsidiaries of a multinational group. The purpose of an IHC is primarily to hold shares. The most beneficial location for an IHC depends on the specific circumstances of each multinational group. There are, however, certain characteristics that must be met for multinational groups to benefit from utilising an IHC. The principal features of an ideal IHC jurisdiction are the following:

• The absence of tax on dividend income and preferably also on other income received;

• No or low with holding tax on dividends declared to the shareholders;

• The absence of CGT on profits from the disposal of investments;

• The absence of tax on capital introduced;

• The absence of a CFC regime;

• The absence of exchange controls.

Should all or most of these principal features be present, the jurisdiction can be described as an ‘ideal’ IHC jurisdiction. Generally, countries like Mauritius, Luxembourg and The Netherlands meet all these requirements.

Is the new South African headquarter regime an ideal IHC regime?

• Dividends declared by a headquarter company will be exempt from income tax and STC.

• A headquarter company will be deemed to be a foreign company for purposes of the CGT participation exemption. Consequently, CGT relief is available for disposals of shares to non-residents. No CGT relief is available for disposals of subsidiaries to residents, nor for any other disposals.

• South Africa does not have share capital tax. However, South Africa applies a Securities Transfer Tax on the transfer of any security at a rate of 0.25% of the taxable amount.

• Subsidiaries of the headquarter company will not be CFCs in relation to the headquarter company. However, the exemption will not apply if more than 50% of the participation or voting rights are held indirectly by the shareholders of the headquarter company.

• Exchange control restrictions will not apply to the funding of its subsidiaries but will apply in all other respects.

Based on the above, the new South African headquarter company does, indeed, comply with most of the requirements for an ideal IHC regime. However, the next question is whether it is also a good headquarter regime. The essential difference between a headquarter regime and an IHC regime is that an IHC is normally incorporated to facilitate the holding of other controlling interests within a multinational group. In contradistinction, a headquarter company will typically perform management functions, intra-group services and intellectual property services to affiliate companies. In performing these services, most of the income derived by a headquarter company will normally be in the form of management fees, technical fees and interest paid by off shore subsidiaries. In the case of the new South African headquarter company, this type of income will be fully taxed. Consequently, the new South African headquarter company regime is not an ideal headquarter regime and, in fact, is misnamed.

In summary, the new South African headquarter company regime conforms in most respects with the criteria for an ideal intermediary holding company regime. When South Africa’s wide tax treaty network is taken into account, it is anticipated that the new regime will be popular for IHC purposes. However,the new regime is not tax efficient when used for international headquarter purposes. There are also several exchange control restrictions which continue to apply to these companies. It is,therefore, hoped that further legislative amendments will be introduced to make the new regime more tax efficient for use as a headquarter regime. In the meantime, it will be less confusing if the name of the regime is changed to the South African holding company regime.

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